Domino’s Pizza chief executive Patrick Doyle said he would never be thrilled with a negative same-store sales result, even the chain’s 1.4-percent decrease for the March 27-ended first quarter, which was based on a 14.3-percent rise a year ago.
Because the year-to-year comparison was based on a time when Domino’s reformulated its pizza and drove sales and traffic to the highest levels in years, being slightly negative does not necessarily spell trouble for the 9,379-unit chain or the pizza segment, Doyle said.
“I’m encouraged by the overall [pizza] category,” Doyle told securities analysts during Domino’s first-quarter earnings call. “It’s getting healthy again. We feel better about where it’s been on sales and traffic versus where it was prior to the last 18 months or so.”
For the quarter, Domino’s net income grew10.6 percent to $27.1 million, or 42 cents per share, compared with $24.5 million, or 35 cents per share, in the same quarter a year earlier. Revenue rose 2.1 percent to $389.2 million, due in large part to higher revenues from the brand’s international division.
Domino’s domestic same-store sales slide of 1.4 percent reflected decreases of 2.3 percent at corporate stores and 1.3 percent at franchised stores.
“The biggest thing affecting percentages was that there was a lot of trial in the first quarter last year,” Doyle said. “After that, the second through the fourth quarters had far more to do with higher retention and frequency, and we saw that continue into the first quarter [of 2011]. … Consumers like our pizza better than they used to, we’re executing better so that we keep more of them, and they’re buying more often.”
In January and February, Domino’s continued its popular offer, which debuted last year and includes two medium, two-topping pizzas for $5.99 each. In the last third of the quarter, the brand pivoted to advertising its chicken products with national TV commercials.
“We sold a lot more chicken given that we hadn’t been on air with it for nine years,” Doyle said. “I won’t go into specifics with what it did to the average ticket except to say that chicken is clearly, for the mass majority of orders, an add-on, and it’s going to help in terms of raising the overall bundle.”
Food costs trend up, labor pains ease
Domino’s increased its projected food cost inflation to a range of between 3 percent and 5 percent for 2011, up from between 3 percent and 4 percent, chief financial officer Mike Lawton said. That increased pressure resulted from cheese prices dropping from a year earlier, but to a level higher than expected. However, Lawton said, the greatest share of commodity inflation happened in the first quarter and likely would ease throughout the rest of the year, and labor costs are expected to be favorable in 2011.
“Three percent to 5 percent on food when labor is flat is manageable at the store level,” Lawton said. “Add to that the fact that we’re overly franchised, and you’re seeing results that surprised on the up side.”
Lawton and Doyle said the labor cost improvements stemmed from the application of a tip credit for delivery drivers, which Domino’s corporate stores did not use until last year, as well as more efficient scheduling compared with the first quarter of 2010, when the chain incurred more overtime to handle the increased volume that went into that quarter’s 14.3-percent same-store sales spike.
Doyle said that, should inflation ratchet up further, Domino’s ability to manage margins on the labor side would factor just as prominently, if not more so, than switching up promotions to affect average check.
“It’s more than a simple equation of food going up and us having to cover it somehow,” Doyle said. “Do we have the ability to take up price? If we needed to, yes, but you’re always going to affect demand. … We have to manage the whole P&L as carefully as we possibly can and in a smarter way than our competitors … we are constantly looking at how consumers react to promotions out there and smart ways to take margin here and there.”
International growing like gangbusters
Lawton and Doyle said the overwhelming majority of Domino’s growth in the near term would come internationally. The chain’s expansion in the United States would be modest at best.
Domino’s added 48 international restaurants in the first quarter. Same-store sales for the division rose 8.2 percent.
Domino’s international growth has come from the brand’s master franchisees execution, as only Mexico has relaunched the chain’s new pizza systemwide, officials said.
“The reason why Mexico is the only one is they were making the exact same pizza as we did here,” Doyle said. “Outside the U.S., mozzarella’s pretty different, for instance, so the exact same kind of relaunch hasn’t happened.”
He added that the international performance was geographically diverse, hitting in virtually all 70 of Domino’s international markets, though Doyle did highlight the United Kingdom, Turkey, Spain and Malaysia as strong performers.
Ann Arbor, Mich.-based Domino’s Pizza operates 427 restaurants and franchises another 4,482 units in the United States, and the franchised international system boasts 4,470 locations.
Contact Mark Brandau at [email protected]